Introduction

Limited liability companies (LLCs) and C Corporations are the two
primary corporate entities in the United States. Each entity type has
some features which are more advantageous for some businesses than for others.

We’ve collected some information here so that you can make an informed
choice, in consultation with your professional advisors.

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Orrick, the global tech law firm, is the legal partner for Stripe Atlas. Experts at Orrick contributed their expertise to this section (see disclaimer), and Atlas users can access a more detailed Atlas Legal Guide written by Orrick.

LLCs

An LLC is a type of company organized under an Operating Agreement,
which is a contract between the owners (called "members”) specifying
how it will be run and how the economic burdens and returns will be
split between the partners.

The possibilities for how to structure an LLC are almost endless, which
can be a blessing and a curse. This makes interfacing with an LLC
challenging, because one has to examine the Operating Agreement (and
potentially other contracts signed between the members) to get a handle
on how the company is governed. C Corporations, by comparison, are more
standardized: they share commonalities like stock to represent
ownership, governance by a board of directors, day-to-day operations handled by officers, etc.

There are a few characteristics that are common to LLCs:

LLCs are intended to provide limited liability for founders;
moving liability for debts and obligations of the business from the entrepreneurs into the company itself.

LLCs offer pass-through taxation, the LLC's owners
generally pay personal income taxes on the income of the business

C Corporations

A C corporation is an entity designed to act as an abstraction layer
between the operators of the business and the owners of the
business, who may or may not be operationally involved. Ownership is
tracked by shares, with each share corresponding to a defined portion of
control of the business and entitlement to the economic upside of it.
Owners are called shareholders.

Many companies which are household names are C corporations; one can own
shares at Google without having any responsibility for working there.
This assumption that control and ownership may be separate flows
through the mechanics and regulation of C corporations. The state of
Delaware has a highly developed body of law governing corporations
which can lead to a high degree of predictability in the event of a legal dispute.

There are a few characteristics common to C corporations:

C corporations are intended to provide limited liability;
shareholders are generally not individually liable for the debts and obligations of the company.

C corporations are assessed corporate taxes on their own profits
(and have extensive filing obligations). Shareholders are taxed
separately, if the company distributes dividends to them (or if it pays them a salary, in the case of employee owners).

Standard features of companies

Both LLCs and C corporations are companies. In the United States, third
parties such as the government and companies you may wish to do business
with are generally happy to deal with both types of company; this is not
true in some countries (where the local equivalents of LLCs may be at
commercial disadvantage relative to local equivalents of C
corporations).

Both LLCs and C corporations are intended to limit the liability of
owners and officers for the acts of the company and for debts which the company may have.

Both LLCs and C corporations can be parties to contracts, can own other
companies (and be owned by them in turn) or virtually any other asset,
can get banking services, and can generally operate businesses.

Assets and IP

LLCs are chosen by many founders of side projects, small teams,
bootstrapped businesses, or businesses which don’t know what they want
to be when they grow up yet. (They can also scale to support businesses
of almost any size. Basecamp is an LLC, for example. Facebook started as an LLC, and converted to a C corporation later.)

One reason why LLCs can be well-suited for side projects is because
money and IP can flow relatively freely between the members of an LLC
and the LLC itself, often without the tax consequences that would result
if the transactions happened in a C corporation, and often with a
minimum of ceremony.

This is conceptually possible with a C corporation, but it involves more
recordkeeping and (potentially) thorny tax considerations, particularly
with regard to, e.g., intellectual property. Most major actions of a C
corporation also require some ceremony, such as formal resolutions of
the company or votes of the stockholders; LLC Operating Agreements often empower the owners and/or managers to simply act.

Taxation

LLCs are considered pass-through entities for the purpose of US
taxation; they don’t file taxes in their own right, but have their
income reported on the personal income tax returns of their owners. C
corporations file their own tax returns. (Somewhat confusingly, C
corporations can sometimes elect pass-through status, and LLCs can elect
to be taxed like a corporation, but these are not their default
treatments.)

Money flowing through an LLC is taxed at the level of the owners of the
LLC; money flowing through a corporation is taxed at both the corporate
level and, additionally, when it passes to the owners (either as salary
or as a distribution of profits).

The different tax treatment of these entities can have interesting
implications, particularly if the company is making losses, as many
companies do early in their lives. A C corporation which makes a loss in
any given year generally carries the loss against future tax years,
where it can be used to offset future profits. A loss earned by an LLC
may generally be used to offset income of the owners during the same
tax year, for example, income from employment.

Consider the case where a company spends $10,000 in its first year in
operation and has no revenue. A C corporation would likely have to defer
that $10,000 loss to a future year to gain any tax benefit. An LLC
might be allowed to reduce its owner’s total income by $10,000; this
could result in decreasing the owner’s income tax bill by several
thousand dollars. For someone working in technology in the US, this
could result in them getting a substantial refund, which they could use
to fund the business’ growth or for any other purpose—it’s their money.

International Owners

Neither the United States nor the state of Delaware currently imposes a
citizenship or residency requirement on the owners of LLCs or C
corporations. That said, owning an LLC can expose non-resident or
non-citizen owners to very complicated tax situations. Non-resident US
citizens may be obligated to file US taxes on the income that their LLCs
earn, and also have to consider how that income will be taxed in their
local jurisdiction.

For example: consider an LLC with two owners, one in the United States
and one non-US citizen in Japan. The owner in Japan will likely be taxed
on their income from the LLC by the United States. The owner in Japan
may also be taxed in Japan on the same income. This substantially
increases the complexity of their tax reporting.

Investment

[M]any types of investors will not be interested in (or may be
legally barred from) investing in LLCs because of the income and loss pass-through nature.

The extreme flexibility available in the LLC form also means that
investors attempting to invest in one will have to do substantial legal
due diligence to ensure that they are buying what they expect to be
buying. Many investors do not want to do substantial expensive legal
work as a condition of making an investment; they prefer to make
investments in standardized companies under standardized terms. C
corporations are much better suited to this preference.

In the event that one receives an offer of investment as an LLC, one may
be requested by many investors (including, e.g., YC) to convert to a
Delaware C corporation as a requirement of taking the investment
before the investment is made.

Employee Ownership

Both LLCs and C corporations can have employees. While in principle it
is possible to give an employee ownership but not control over an LLC,
this is non-trivial. C corporations have well-understood mechanics to
issue employees equity or options for equity, with well-understood tax
consequences, and cultural and infrastructural support for this form of
ownership throughout the tech industry.

Employees and advisors are likely much more comfortable with receiving
equity than they are becoming members in an LLC, which could
complicate their own tax situations for the length of the LLC’s life (even if, e.g., they leave the employment of the LLC).

Vesting

Vesting is a mechanism by which founders or employees of a company earn their ownership over time.

Stripe Atlas LLCs do not include a vesting schedule for equity. While
corporations have a clean way to distinguish partners in the enterprise
from owners, these concepts are intrinsically commingled in LLCs. An
owner departing an LLC may require a negotiation between the departing
partner and remaining partners regarding the terms of the separation
(though the Stripe Atlas LLC has some terms to address this process).
Some companies will want this to be a clean break, potentially with the
remaining parties buying out the departing partner’s interest. Some may
want to continue paying the departing partner a portion of the profits.
These decisions are complicated and often depend on companies’ situations and the desires of their owners.

Norms for vesting are also not as established in LLCs as they are in C
corporations in the tech industry; many LLCs are formed between family
members (where relationship considerations may trump contractual
arrangements), departures which do not result in the partnership
dissolving are rarer, and ownership without control would not be as
valuable as it frequently becomes in C corporations, which often contemplate operating at materially larger scale.

Converting an LLC into a C Corporation

LLCs can generally be converted into C corporations. (In principle, C corporations can convert into LLCs, but this is rarely done.)

Because LLCs are governed by contractual arrangements between the
members, derisking the conversion process for an LLC generally requires
extensive legal review, which increases the monetary and time costs of
converting.

Stripe Atlas LLCs have their Operating Agreements written to anticipate
a possible conversion. There is a defined process to start a conversion.
The ownership is tracked in units which can map to issuance of shares in
a future C corporation. Orrick, a legal firm with substantial experience
in startups, has written a guide outlining the conversion process and
has provided annotated templates that Stripe Atlas users can customize
for conversion.

Where is the LLC formed?

Each state of the United States can form LLCs and C corporations,
irrespective of where the founders live or where the actual operations
of the company take place. Each state attempts to create a product
offering for their LLCs / C corporations which makes them attractive, for the purpose of attracting fees and economic development locally.

All Stripe Atlas LLCs at present are formed in the state of Delaware,
and may require registration as a “foreign” LLC in the owners’ state(s)
of residence or operation. This is typically a straightforward process
requiring a modest fee per year. Regulations for founders living outside
the US vary widely; please consult a local accountant or attorney or
your local government.

Stripe Atlas LLCs are formed in Delaware. Orrick’s legal guide describes
some benefits of forming in Delaware:

Delaware LLCs have the benefit of being simple to form, extremely
flexible (with few restrictions on management and governance
arrangements), and more familiar to parties you will interact with. In
addition, the process of converting a Delaware LLC to a Delaware
corporation, should you ever decide to do so, is straightforward and
common enough that there are standard forms addressing most elements of the process.

The Stripe Atlas LLC in brief

Some features of the Stripe Atlas LLC are common to many LLCs; some are
customized for the needs of technology founders.

You should read the entire Operating Agreement before you sign it,
because it is a legal contract, but here is some information about its terms:

The LLC is organized under the laws of Delaware.

The Stripe Atlas LLC is managed by the managers, allowing
day-to-day decision and management responsibility to be distinct
from ownership (being a member). The company can have non-owner
managers or owners who do not have management responsibilities.

The Stripe Atlas LLC contains an IP assignment in its Operating
Agreement assigning relevant IP that has already been created and is held by the members to the LLC at the time the LLC is formed.

Ownership in the Stripe Atlas LLC is tracked via 10,000,000 units,
which function similarly to shares, and which represent a simple
ownership stake of the company with only a single class of owner.

The Stripe Atlas LLC includes language to simplify the process of
conversion to a Delaware C corporation.

The Stripe Atlas LLC does not include vesting of ownership, for reasons discussed later.

All Stripe Atlas LLC users receive an Orrick legal guides that provides
in-depth information about LLCs, C Corporations and about the Operating Agreement and other templates used with Stripe Atlas.

Get started

Whether you want to form a C Corporation or an LLC, Stripe Atlas can
help you get started. Learn more.

This guide is not intended to and does not constitute legal or tax advice, recommendations, mediation or counseling under any circumstance. This guide and your use thereof does not create an attorney-client relationship with Stripe, Orrick, or PwC. The guide solely represents the thoughts of the author and is neither endorsed by nor does it necessarily reflect Orrick's belief. Orrick does not warrant or guarantee the accurateness, completeness, adequacy or currency of the information in the guide. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular problem.